This simple tactic could boost your investment returns by 10%

Regularly reviewing and rebalancing your portfolio could have boosted your investment returns by almost 10% over 20 years, analysis from Fidelity International reveals.

While following the adage of not putting all your eggs in one basket when building your investment portfolio is a sensible investment strategy and will often serve you well, it's equally important to monitor your portfolio once it's set up.

'Rebalancing' means selling some of the assets that have grown in value to buy more of those that have fallen in value. However, particularly if you have a small portfolio, you should watch out for any dealing fees that may be incurred when buying and selling investments to make sure they don't wipe out any potential gains from this strategy.

Over time an investment portfolio can become unbalanced due to the ups and downs of its constituent investments. It is critical, therefore, to periodically review the balance of your holdings to ensure they continue to meet your needs. Furthermore, by rebalancing your portfolio annually you could significantly enhance your returns.

For example, if you had invested a £1,000 in each of the thirteen principle asset classes (see chart below) 20 years ago, your initial investment would now be worth £52,881. However, had you been even more prudent and rebalanced your portfolio equally across the thirteen different asset classes each year then your investments would have grown to £57,930 - over £5,000 more.

Rebalanced portfolio vs portfolio that has not been rebalanced

Source: Fidelity International, May 2017. Sourced from Datastream. Based on £1000 being invested in each asset class on 31 December 1996.

'Rebalancing once a year is sufficient'

Tom Stevenson, investment director for personal investing at Fidelity International says: "While simply investing in a diversified portfolio and forgetting about it will have yielded you some very good returns, our analysis shows that it can really pay to take the time to review and rebalance your portfolio.

"This makes sense. Rebalancing allows you to crystallise some of your gains while also exposing you to subsequent recovery in asset classes which have underperformed."

He adds not only can reviewing and rebalancing your portfolio significantly boost your returns, it also helps to ensure that your portfolio continues to be aligned to your risk appetite and objectives - as market movements can knock your portfolio out of kilter.

But, Stevenson warns against tinkering too much, in order to keep a lid on trading fees.

"Remember, that you don't need to do this too frequently - indeed there is a good argument for not tinkering too much with your portfolio as doing so will incur unnecessary trading costs and won't give your investments time to grow. A proper review once a year is sufficient."

Performance of asset classes over the past 20 years

This article was first published by our sister magazine Moneywise, available online here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.